The Myth of Market Failures

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Although
the idea is widely taught in undergraduate and graduate economics
courses, there is very little to it, when you look closely. Market
failures are either trivial conditions no one can be justly upset
about or they simply do not exist at all.

Two
kinds of market failures are usually mentioned in the literature,
especially ones critical of free market capitalism. The first kind
of alleged market failure is supposed to occur when a bit of coercive
interference is taken to advance efficiency over what the free market
provides. This is the kind famously associated with John Stuart
Mill who believed that so-called public utilities need to be made
into state enterprises because leaving their provision to the free
market would produce waste. Thus, for example, water lines would
be unnecessarily duplicated if the provision of water were made
a matter of the free, competitive market. Ditto for electricity,
natural gas and, of course, the roads, we may presume.

The
second kind of alleged market failure is when free markets do not
make available goods or services deemed to be important, vital.
John Kenneth Galbraith mentions public libraries, schools, and the
like (in his The
Affluent Society
). Here the idea is that when the free market
lacks these vital provisions, some sort of failure is in evidence.

The
first case of alleged market failure is no such thing because it
assumes that some alternative method for providing the goods or
services could be more efficient. Yet, as public choice theory has
shown, what occurs instead is that political failures replace the
so-called market failures, ones that are far more severe and lasting
than the supposed wasteful duplications of free markets. Mill was
wrong, also, because he failed to notice that nearly all competitive
production can be faulted for producing supposedly wasteful duplication
– ten competing shoe manufacturers all need to have the equipment,
overhead, and delivery systems to get their shoes to market, so
why not fuss about that duplication? (Indeed, it is Karl Marx who
regarded the market anarchic and irrational for, among other things,
just such duplications.) But Mill also failed to appreciate that
once one places the provision of anything whatever into the purview
of coercive government, all the ills of politics will beset the
process. Graft, special interest favoritism, pork and similar "inefficiencies,"
not to mention violations of justice, will make for a far greater
mess than a little duplication ever would.

But
lets turn now to Galbraith's beef. So, markets do not always guarantee
the production of everything we might want. I, personally, really
wish there were many more pairs of orange socks for sale but, alas,
I need to hunt these down at considerable expense to my patience
and frustration in what is surely a free market in socks. Most of
the time the hunt is fruitless. Or, perhaps more compellingly, I
want to be able to eat a certain kind of bread that's near and dear
my heart from my having had it available in Switzerland when I lived
there. Alas, this kind of bread is extremely difficult and costly
to get a hold of – at one time I actually shipped it via UPS from
Oceanside, NY, to Auburn, Alabama.

When
people want to read books that aren't easily obtainable, well, they
just have to go that extra mile to get them. Nowadays, of course,
this is a cinch, via the Internet, but even in the old days there
were plenty of specialty book sellers advertised in all kinds of
magazines from which the book one wanted could be bought.

But
that isn't really the main problem – if some things aren't produced
in a free market, very likely it is difficult if not impossible
to make a decent living from producing and selling them. So, then
those wanting these things badly need to go without or enter the
fray themselves and make the wanted items so they can have them
after all. There is no market failure in sight with any of this
in evidence; all we have is some dissatisfaction, just as some of
us are dissatisfied with the fact that no one matches our romantic
aspirations, no one will play tennis with us or be our dance partner.
Is that a failure of some sort of a free society, one in which one
is forbidden to kidnap people so they might become one's convenient
associate?

Indeed,
the beef about market failures is with life itself – not everything
one would like to have is there for one to get. Is this a reason
to shut down the free market and transform it into the far more
inefficient, let alone unjust, statist system Galbraith and Co.
desire? Not by a long shot.

January
26, 2004

Tibor
Machan [send
him mail
] holds
the Freedom Communications Professorship of Free Enterprise and
Business Ethics at the Argyros School of Business & Economics, Chapman
University, CA. A Research Fellow at the Hoover Institution, Stanford
University, he is author of 20+ books, most recently, Putting
Humans First: Why We Are Nature’s Favorite
.

Tibor
Machan Archives


        
        

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